JOSÉ A. CABRANES, Circuit Judge:
In this "insider information" securities fraud case, we consider two issues on appeal raised by defendant-appellant Raj Rajaratnam. The first issue is whether the United States District Court for the Southern District of New York (Richard J. Holwell, Judge) should have suppressed the evidence obtained by the government's wiretap of Rajaratnam's cell phone. Specifically, Rajaratnam argues that the District Court erred by applying the analytical framework set forth in Franks v. Delaware, 438 U.S. 154, 98 S.Ct. 2674, 57 L.Ed.2d 667 (1978), to determine whether suppression was warranted, and by concluding that the alleged misstatements and omissions in the government's wiretap application did not require suppression.
The second issue concerns the District Court's instruction to the jury that it could convict Rajaratnam of securities fraud if the "material non-public information given to the defendant was a factor, however small, in the defendant's decision to purchase or sell stock." Rajaratnam contends that this instruction was in error and requires us to vacate the substantive counts of conviction for securities fraud (Counts 6 through 14).
Rajaratnam's arguments are not persuasive. In affirming the judgment of conviction, we conclude that: (1) the District Court properly analyzed the alleged misstatements and omissions in the government's wiretap application under the analytical framework prescribed by the Supreme Court in Franks; (2) the alleged misstatements and omissions in the wiretap application did not require suppression, both because, contrary to the District Court's conclusion, the government did not omit information about the SEC investigation of Rajaratnam with "reckless disregard for the truth," and because, as the District Court correctly concluded, all
Rajaratnam founded and managed the Galleon Group ("Galleon"), a family of hedge funds. When Galleon was at its pinnacle, the fund employed dozens of portfolio managers, analysts, and traders, and invested billions of dollars of client funds.
In 2011, Rajaratnam was indicted on five counts of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371, and nine counts of securities fraud, in violation of 15 U.S.C. § 78j(b) and 78ff, 17 C.F.R. §§ 240.10b-5 and 240.10b5-2, and 18 U.S.C. § 2. The conduct underlying the five charged conspiracies took place between 2003 and 2009 and consisted of Rajaratnam trading securities based on inside information he received from certain individuals about various publicly-traded companies. The alleged conspiracies involved inside information passed unlawfully to Rajaratnam from: (1) Anil Kumar, a senior partner at McKinsey & Company, Inc. (Counts 4 and 13); (2) Rajiv Goel, an executive of Intel Corporation (Counts 3, 6, 7, and 14); (3) Danielle Chiesi, a portfolio manager at another hedge fund (Counts 5, 8, 9, and 10); (4) Roomy Khan, a former Galleon employee (Count 2); and (5) other former and current Galleon employees, including one by the name of Adam Smith (Count 1). Joint App'x 268-97.
Beginning in 2007, the United States Attorney's Office for the Southern District of New York ("USAO") and the Federal Bureau of Investigation ("FBI") began investigating Rajaratnam based on suspicions that he was using inside information in executing certain securities transactions. On March 7, 2008, the government sought authorization to wiretap Rajaratnam's cell phone. The wiretap application was submitted to then-United States District Judge Gerard E. Lynch and sworn to by then-Assistant United States Attorney ("AUSA") Lauren Goldberg. It included a 53-page affidavit sworn to by FBI Special Agent B.J. Kang.
Title III of the Omnibus Crime Control and Safe Streets Act of 1968 ("Title III"), 18 U.S.C. §§ 2510-2522, requires that wiretap applications provide "a full and complete statement of the facts and circumstance relied upon by the applicant" to establish probable cause, id. § 2518(1)(b), and a "full and complete statement as to whether or not other investigative procedures have been tried and failed or why they reasonably appear to be unlikely to succeed if tried or to be too dangerous," id. § 2518(1)(c).
To establish "probable cause," the wiretap application set forth, inter alia, statements made by Rajaratnam to Roomy Khan (identified as "CS-1"), as well as summaries of conversations between Khan and Rajaratnam that Khan had recorded, which indicated that Rajaratnam and Khan were exchanging material, non-public information used to trade securities. See Joint App'x 77-81. To establish "necessity," the wiretap application stated, inter alia, that "normal investigative techniques," such as physical surveillance, federal grand jury subpoenas for witness testimony, review of trading records, witness interviews, use of confidential informants, and placement of undercover agents, had been tried and had "failed or reasonably appear[ed] unlikely to succeed if tried." Id. at 58, 102-12.
On the basis of these representations, Judge Lynch authorized the wiretap of Rajaratnam's cell phone on March 7, 2008. Seven subsequent wiretap applications were also approved. See note 1, ante. On October 16, 2009, based in large part on evidence obtained from the wiretap of Rajaratnam's cell phone, Rajaratnam was arrested and charged with multiple counts of securities fraud. He was indicted two months later. A Superseding Indictment was returned on February 9, 2010, and a Second Superseding Indictment was returned on January 20, 2011.
On May 7, 2010, Rajaratnam filed a motion to suppress the evidence obtained through the wiretap of his cell phone, claiming that the wiretap application contained certain misstatements and omissions. As relevant here, Rajaratnam took issue with the statements supplied on the government's wiretap application regarding both "probable cause" and "necessity."
On the question of "probable cause," Rajaratnam argued that the government made misstatements and omissions regarding the reliability of Roomy Khan. In particular, he observed that the wiretap application stated that Khan "ha[d] not yet been charged with any crimes," Joint App'x 77, and "ha[d] been cooperating with the FBI since approximately November 2007," id. at 77 n. 4. In fact, in 2001, Khan was indicted and pleaded guilty to felony wire fraud and, in 2002, she began cooperating with the government in an earlier investigation involving Rajaratnam. Rajaratnam also asserted that the wiretap application included two paraphrased summaries of recorded conversations between Khan and Rajaratnam that mischaracterized the actual recorded conversations, as we describe in detail below. See Background Part C.ii.a., post.
On the question of "necessity," Rajaratnam argued that the wiretap application improperly omitted the fact that Rajaratnam and Galleon had been the subject of an ongoing SEC investigation, which led
The District Court then decided whether to hold a hearing for the purpose of considering Rajaratnam's suppression motion. In doing so, it noted that "[w]here a defendant makes a preliminary showing that the government's affidavit misstated or omitted material information, Franks instructs a district court to hold a hearing to determine" whether the alleged misstatements or omissions in the warrant or wiretap application were made intentionally or with "reckless disregard for the truth" and, if so, whether any such misstatements or omissions were "material." United States v. Rajaratnam, No. 09 Cr. 1184(RJH), 2010 WL 4867402, at *7-8 (S.D.N.Y. Nov. 24, 2010); see United States v. Falso, 544 F.3d 110, 125 (2d Cir.2008). In other words, "[t]o suppress evidence obtained pursuant to an affidavit containing erroneous information, the defendant must show that: (1) the claimed inaccuracies or omissions are the result of the affiant's deliberate falsehood or reckless disregard for the truth; and (2) the alleged falsehoods or omissions were necessary to the [issuing] judge's probable cause [or necessity] finding." United States v. Canfield, 212 F.3d 713, 717-18 (2d Cir.2000) (internal quotation marks omitted); see also United States v. Awadallah, 349 F.3d 42, 64 (2d Cir.2003) (noting that "[i]n order to invoke the Franks doctrine, [a defendant] must show that there were intentional and material misrepresentations or omissions in [the] warrant affidavit." (emphases supplied)).
To determine whether misstatements are "material," a court must "set[ ] aside the falsehoods" in the application, United States v. Coreas, 419 F.3d 151, 155 (2d Cir.2005), and determine "[w]hether the untainted portions [of the application] suffice to support a probable cause [or necessity] finding," United States v. Nanni, 59 F.3d 1425, 1433 (2d Cir.1995). If the untainted portions of the application are sufficient to support the probable cause or necessity findings, then the misstatements are not "material" and suppression is not required.
Although omissions "are governed by the same rules" as misstatements, United States v. Ferguson, 758 F.2d 843, 848 (2d Cir.1985), "the literal Franks approach [does not] seem[ ] adequate because, by their nature, omissions cannot be deleted"; therefore "[a] better approach... would be to ... insert the omitted truths revealed at the suppression hearing," United States v. Ippolito, 774 F.2d 1482, 1487 n. 1 (9th Cir.1985). Accordingly, we have held that "[t]he ultimate inquiry is whether, after putting aside erroneous information and [correcting] material omissions, there remains a residue of independent and lawful information sufficient to support [a finding of] probable cause [or necessity]." Canfield, 212 F.3d at 718 (internal quotation marks omitted); see also United States v. Martin, 615 F.2d 318, 328 (5th Cir.1980) ("[W]e [are] required to determine whether, if the omitted material had been included in the affidavit, the affidavit would still establish probable cause [or necessity].... If it would not, we would be required to void the warrant and suppress the evidence seized pursuant to it.").
On August 12, 2010, the District Court found that Rajaratnam had "made a substantial
At the Franks hearing, which began on October 4, 2010, the District Court heard testimony from (1) Linda Beaudreault, counsel to Galleon and Rajaratnam; (2) Andrew Michaelson, an SEC staff attorney who, after the wiretap was authorized, became a Special United States Attorney in order to participate in the investigation by the USAO; (3) FBI Special Agent Kang, the wiretap application affiant; and (4) former AUSA Goldberg, who filed the March 7, 2008 wiretap application.
The Franks hearing focused on the alleged misstatements and omissions in the wiretap application. Accordingly, we briefly describe those asserted misstatements and omissions as well as the evidence about the states of the mind of the government agents who filed the wiretap application.
As noted, Khan served as a cooperating witness for the government and recorded various phone conversations with Rajaratnam, some of which were summarized in the wiretap application and cited as evidence of probable cause.
The District Court determined that the government's wiretap application made two misstatements with regard to Khan's background. First, the wiretap application stated that Khan "has not yet been charged with any crimes," Joint App'x 77, when, in fact, she had a prior felony fraud conviction, see Rajaratnam, 2010 WL 4867402, at *10. Second, the application stated that Khan "has been cooperating with the FBI since approximately November 2007," Joint App'x 77 n.4, when, in fact, she had cooperated in an earlier insider trading investigation of Rajaratnam which began in the late 1990s, see Rajaratnam, 2010 WL 4867402, at *10.
Moreover, the District Court found to be misleading two statements that the government had paraphrased from recorded conversations between Khan and Rajaratnam. With regard to the first paraphrased conversation, the wiretap application stated that, when Khan asked Rajaratnam whether he was "getting anything on Intel," Rajaratnam said "that Intel
Joint App'x 80-81 (emphasis supplied). This paraphrase, however, differed from Rajaratnam's actual answer to Khan's question; instead of saying "somebody who knows," Rajaratnam had in fact said, "Yeah I mean, somebody who knows his stuff." Rajaratnam, 2010 WL 4867402, at *11. The District Court found this actual response to be "more equivocal than the government's paraphrase...." Id.
In addition to the misstatements and omissions involving Khan, the wiretap application also omitted certain information, which was relevant to the issue of "necessity," regarding the ongoing investigation of Rajaratnam being conducted by the SEC.
Specifically, the SEC investigation had consisted of the following. In September 2006, the SEC began an investigation of Sedna Capital Management LLC, a hedge fund managed by Rajaratnam's brother. As a result of that investigation, the SEC began focusing on Galleon and Rajaratnam. Beginning in early 2007, the SEC started an on-site investigation of Galleon, through which the SEC: (1) received four
The District Court was troubled not only by the fact that the wiretap application did not disclose the existence of the SEC investigation, but also by the apparent consequence that this omission made other statements in the application misleading. See id. at *17-18. For example, the wiretap application asserted that interviewing or arresting Rajaratnam or other target subjects "is too risky at the present time," Joint App'x 108-09, despite the fact that the SEC had already interviewed and deposed Rajaratnam. Similarly, the application asserted that requesting additional trading records "would jeopardize the investigation" because "clearing firms ... sometimes alert the traders to the requests," id. at 108,
Finally, at the Franks hearing, the government presented testimony designed to demonstrate that the alleged "omission" in the wiretap application regarding the SEC investigation, such as it may have been, was not made with "reckless disregard for the truth." In particular, former AUSA Goldberg testified that "[n]obody tried to hide" the existence of the SEC investigation. Franks Tr. 773. Goldberg also expressed her view that "it would be obvious to anyone reading the affidavit that the SEC was" giving certain information to prosecutors and agents investigating criminal charges. Id.; see also Gov't's Br. 23 (noting that "Special Agent Kang's affidavit referenced" in seven different places the USAO's and FBI's "reliance on documents collected or information provided by the SEC"). Moreover, the government asserts that, because of recent court decisions arising out of the improper use of civil SEC investigations for criminal prosecutions, the USAO "took pains not to direct the SEC's investigative actions" and, in a similar vein, "did not view the SEC Staff investigation as an alternative law enforcement means to investigate Rajaratnam and his associates." Id. at 24 (citations omitted).
On November 24, 2010, the District Court denied Rajaratnam's suppression motion. See Rajaratnam, 2010 WL 4867402, at *28. In analyzing the government's wiretap application under Franks, the District Court made three central findings.
First, on the issue of "probable cause," the District Court held that a Franks hearing was unnecessary because the alleged misstatements and omissions in the wiretap application regarding Khan's prior conviction and cooperation as well as the assertedly misleading paraphrased conversations between Khan and Rajaratnam
Second, on the issue of "necessity," the District Court held that the omission of the SEC's investigation of Rajaratnam was made with "reckless disregard for the truth."
Third, although the District Court determined that information regarding the SEC investigation was omitted with "reckless disregard for the truth," it concluded that suppression was not warranted because Rajaratnam had failed to show that the omission was "material" to the Court's determination of "necessity." In particular, the District Court held that,
Id. at *1.
Rajaratnam's trial began on March 8, 2011. On May 11, 2011 — after a seven-week trial and twelve days of deliberation — the jury returned a verdict convicting Rajaratnam on all nine counts of securities fraud and all five counts of conspiracy to commit securities fraud. On October 13, 2011, Judge Holwell sentenced Rajaratnam to a term of 132
This appeal followed.
Rajaratnam first argues that the District Court erred by using the analytical framework set forth in Franks v. Delaware, 438 U.S. 154, 98 S.Ct. 2674, 57 L.Ed.2d 667 (1978) — which involved a warrant application for a physical search, not a wiretap — to determine whether the alleged misstatements and omissions in the government's wiretap application required suppression. In particular, he takes issue with the "post hoc factual justification," Rajaratnam's Br. 30, that the Franks framework allows — i.e., (1) removing misstatements from the application, see Coreas, 419 F.3d at 155; and (2) "insert[ing] the omitted truths revealed at the suppression hearing" after the fact, Ippolito, 774 F.2d at 1487 n. 1, to determine whether the application would have been granted in any event. Simply put, he asserts that the statute authorizing Title III wiretaps requires suppression because the government's wiretap application did not provide the "full and complete statement" regarding probable cause and necessity, as required by 18 U.S.C. § 2518(1)(b)-(c).
Rajaratnam's argument is foreclosed by settled precedent. In United States v. Bianco, 998 F.2d 1112 (2d Cir.1993), abrogated, on other grounds by Groh v. Ramirez, 540 U.S. 551, 124 S.Ct. 1284, 157 L.Ed.2d 1068 (2004), we noted our agreement "with the district court's, application of Franks and with its findings" where the government submitted a Title III application for a "roving bug"
Finally, we note that the cases relied on by Rajaratnam — United States v. Giordano, 416 U.S. 505, 94 S.Ct. 1820, 40 L.Ed.2d 341 (1974), and United States v. Gigante, 538 F.2d 502 (2d Cir.1976) — are not to the contrary. Both cases were decided before the Supreme Court's decision in Franks and "[a]t that time there was no good-faith or other exception to the judicially crafted exclusionary rule for violations of the fourth amendment." Bianco, 998 F.2d at 1126. When Title III was enacted, it was not intended "generally to press the scope of the suppression role beyond [then current] search and seizure law." S.Rep. No. 90-1097, at 96 (1968), reprinted in 1968 U.S.C.C.A.N. 2112, 2185. But thereafter, Franks and other cases, including United States v. Leon, 468 U.S. 897, 104 S.Ct. 3405, 82 L.Ed.2d 677 (1984), "narrowed the circumstances in which ... [courts] apply the exclusionary rule." Bianco, 998 F.2d at 1126. Although courts were once thought to face a "dilemma of whether [or not] to apply the Franks standard to Title III cases," id. that supposed dilemma has been definitively resolved, and every Court of Appeals to consider the issue has concluded that the analytical framework of Franks is an appropriate standard against which to review allegedly deficient Title III wiretap applications.
In light of these precedents of our Court and our sister Circuits, we hold that the District Court did not err by applying the analytical framework of Franks to determine whether the government's wiretap application required suppression.
As noted, Title III requires government agents who file a wiretap application to
It is an axiom of appellate procedure that we review legal questions de novo and questions of fact for clear error. See Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988). That axiom holds true in the context of Franks hearings, see Awadallah, 349 F.3d at 65; United States v. Moore, 968 F.2d 216, 220-21 (2d Cir.1992), and therefore our review is similar for each of the issues in this appeal. For instance, whether a person acted with "reckless disregard for the truth" is "a factual question of intent, and we therefore review the court's decision for clear error," United States v. Trzaska, 111 F.3d 1019, 1028 (2d Cir.1997), but a district court's understanding of the "reckless disregard" standard is reviewed de novo. Similarly, we review for "clear error" the factual findings that underpin a district court's assessment of probable cause, but we review de novo whether a set of facts satisfies the probable cause standard. See Ornelas v. United States, 517 U.S. 690, 699, 116 S.Ct. 1657, 134 L.Ed.2d 911 (1996). Along the same lines, whether a misstatement or omission is "material" — i.e., "[w]hether the untainted portions [of the affidavit] suffice to support a probable cause [or necessity] finding," Canfield, 212 F.3d at 717 (citation omitted) — is a mixed question of law and fact reviewed de novo, see Awadallah, 349 F.3d at 65, but any underlying factual findings are reviewed for "clear error." An appellate court recognizes "clear error" only when it "is left with a definite and firm conviction that a mistake has been committed." Brown v. Plata, ___ U.S. ___, 131 S.Ct. 1910, 1930, 179 L.Ed.2d 969 (2011) (internal quotation marks omitted).
Rajaratnam maintains that the District Court correctly concluded that government agents omitted information about the SEC investigation of Rajaratnam from the wiretap application with "reckless disregard for the truth." In turn, the government argues that the District Court incorrectly applied the "reckless disregard" standard.
The Supreme Court in Franks held that misstatements or omissions caused by "negligence or innocent mistake[s]" do not warrant suppression. 438 U.S. at 171, 98 S.Ct. 2674. This inquiry, which looks to the mental states of mind of government officials, is said to be a "subjective" test rather than an "objective" one. See, e.g., Farmer v. Brennan, 511 U.S. 825, 838-40, 114 S.Ct. 1970, 128 L.Ed.2d 811 (1994) (discussing the difference between "subjective" and "objective" tests). Whether an individual had a particular mental state "is a question of fact subject to demonstration in the usual ways, including inference from circumstantial evidence," id. at 842, 114 S.Ct. 1970, but courts must not "confus[e] a mental state with the proof of its existence," id. (quotation marks omitted).
A wiretap applicant does not necessarily act with "reckless disregard for the truth" simply because he or she omits certain evidence that a reviewing court, in its judgment, considers to be "clearly critical." Rather, the reviewing court must be presented with credible and probative evidence that the omission of information in a wiretap application was "designed to mislead" or was "made in reckless disregard of whether [it] would mislead." Awadallah, 349 F.3d at 68 (emphasis and internal quotation marks omitted). As we have said:
Id. at 67-68 (quoting United States v. Colkley, 899 F.2d 297, 300-01 (4th Cir. 1990) (alterations in Awadallah; emphases in Colkley)). In a similar vein, the Seventh Circuit has explained:
United States v. Whitley, 249 F.3d 614, 621 (7th Cir.2001) (internal quotation marks and alterations omitted); see also United States v. Williams, 718 F.3d 644, 649-50, No. 11-3129, 2013 WL 2149897, at *5 (7th Cir. May 20, 2013) (applying the subjective standard for recklessness to omissions from an affidavit). But see Wilson v. Russo, 212 F.3d 781, 788 (3d Cir.2000) ("[O]missions are made with reckless disregard if an officer withholds a fact in his ken that `[a]ny reasonable person would have known ... was the kind of thing the judge would wish to know.'" (quoting United States v. Jacobs, 986 F.2d 1231, 1235 (8th Cir.1993))).
Of course, the "reckless disregard" aspect of a Franks inquiry can sometimes be inferred from the omission of critical information in a wiretap application. See Rivera v. United States, 928 F.2d 592, 604 (2d Cir.1991) ("Recklessness may be inferred where the omitted information was clearly critical to the probable cause determination." (emphasis supplied) (internal quotation marks omitted)). Subjective intent, after all, is often demonstrated with objective evidence. But such an inference is not to be automatically drawn simply because a reasonable person would have included the omitted information, cf. Farmer, 511 U.S. at 842, 114 S.Ct. 1970,
In this case, Judge Holwell's view that the SEC investigation was "clearly critical" is the only basis for his conclusion that the government omitted certain information about that investigation with "reckless disregard for the truth." But as we now review all of the evidence presented at the Franks hearing, it points in the opposite direction. And, despite the inferences that Judge Holwell drew from the omitted "clearly critical" information, when discussing the subjective state of mind of each affiant, he too "comfortably conclude[d] that no one acted with the deliberate intent to mislead Judge Lynch." Rajaratnam, 2010 WL 4867402, at *19.
The evidence presented at the Franks hearing showed that no one in the USAO acted with "reckless disregard for the truth" by not detailing the SEC investigation of Rajaratnam. Former AUSA Goldberg testified that, when she "was drafting the affidavit, it never occurred to [her], never crossed [her] mind to put a section in [the wiretap application] that [discussed the] SEC investigation.... [because] [she] didn't think about the SEC investigation as an alternative technique that was available to FBI agents, because [the USAO] can't direct them what to do." Franks Tr. 819. Similarly, FBI Special Agent Kang testified that he "didn't think about including [the SEC investigation] in a criminal affidavit.... We just didn't really think about it." Although the District Court believed that this civil investigation by the SEC was relevant to the issue of necessity, the evidence presented at the Franks hearing in no way suggested that omitting certain information about SEC investigation was "designed to mislead" or was made with "reckless disregard of whether [it] would mislead." Awadallah, 349 F.3d at 68 (internal quotation marks and emphasis omitted). Indeed, the evidence indicates that the wiretap application was reviewed by supervisors at the USAO, none of whom thought that additional information about the SEC's civil investigation needed to be included.
On a more fundamental level, we cannot conclude that the government omitted certain information about the SEC investigation with "reckless disregard for the truth" when it is clear that fully disclosing the details of that investigation would only have strengthened the wiretap application's "necessity" showing.
Rajaratnam, 2010 WL 4867402, at *22 (emphasis supplied). In other words, the evidence does not support the inference that the government omitted information from a wiretap application with "reckless disregard for the truth," and such an inference seems ever more inappropriate where the information omitted would only have further supported the government's position.
After reviewing the evidence in the record — especially the Franks hearing testimony regarding the states of mind of the government agents — and applying the correct understanding of reckless disregard, we conclude that the record does not support the finding that the omission of the SEC investigation in the Title III wiretap application was made with "reckless disregard for the truth."
In any event, even if we were to assume, arguendo, the opposite conclusion — that government officials omitted information about the SEC investigation with "reckless disregard for the truth" — we are persuaded that this omission was not material, substantially for the reasons stated in the District Court's analysis on that issue. Rajaratnam, 2010 WL 4867402, at *21-24 (holding that the wiretap application, as corrected, was sufficient to support a finding of "necessity").
Rajaratnam argues that the District Court also erred by concluding that the alleged deficiencies in the wiretap application regarding probable cause were not "material," and therefore that suppression was not required.
Finally, Rajaratnam argues that his convictions on the substantive securities fraud counts (Counts 6 through 14) should be vacated because the District Court instructed the jury that it could convict Rajaratnam if the "material non-public information given to the defendant was a factor, however small, in the defendant's decision to purchase or sell stock." Joint App'x 433 (emphasis supplied). In particular, he asserts that the emphasized fragment of the instructions to the jury allowed the jury to convict him without finding the necessary causal connection between the inside information he possessed and the trades he executed. On appeal, our review of jury instructions for legal error is de novo. See United States v. Robinson, 702 F.3d 22, 30 (2d Cir.2012).
"Insider trading — unlawful trading in securities based on material non-public information — is well established as a violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5."
In United States v. Teicher, 987 F.2d 112 (2d Cir.1993), we stated, in dicta, that a "knowing possession" standard satisfied the "in connection with" requirement of § 10(b) and Rule 10b-5, see note 22, ante, despite the defendant's argument that a "causal connection" was required between the inside information and the executed transaction. Id. at 120-21. In discussing the appropriate standard, we noted that "[a] number of factors weigh in favor of a `knowing possession' standard," including that: (1) "§ 10(b) and Rule 10b-5 require only that a deceptive practice be conducted in connection with the purchase or sale of a security"; (2) "a knowing possession standard comports with the oft-quoted maxim that one with a fiduciary or similar duty to hold material nonpublic information in confidence must either disclose or abstain with regard to trading"; and (3) "a knowing possession standard has the attribute of simplicity." Id. at 120 (internal quotation marks omitted).
Fifteen years later, in United States v. Royer, 549 F.3d 886 (2d Cir.2008), we elevated the dicta of Teicher to the law of the
Like the jury instructions in Royer,
Undeterred by these precedents, Rajaratnam argues that the Supreme Court's recent decision in CSX Transportation, Inc. v. McBride, ___ U.S. ___, 131 S.Ct. 2630, 180 L.Ed.2d 637 (2011), casts doubt on the law of our Circuit. We are not persuaded. In CSX Transportation, the Supreme Court held that, under the Federal Employers' Liability Act ("FELA"), a railroad worker need only demonstrate that the railroad's negligence "played a part — no matter how small — in bringing about the injury." Id. at 2644. Rajaratnam relies on CSX Transportation because the Court noted that the statutory causation requirement in the FELA — that the injury "result[] in whole or in part from [the defendant's] negligence" — was "as broad as could be framed," id. at 2636, and it contrasted the FELA causation requirement with "traditional notions of proximate causation under the RICO, antitrust, and securities fraud statutes," id. at 2644 n. 14 (emphasis supplied). In substance, Rajaratnam contends that the Supreme Court's reasoning in CSX Transportation implies that securities fraud cases require some causation element greater than the formulation that the inside information "played a part — no matter how small."
To the contrary, the Supreme Court's statements about the FELA causation requirement and the causation requirement in "securities fraud statutes," do not call into question our decisions in Royer and Teicher. Indeed, the Supreme Court's reference to "securities fraud statutes" in
To summarize, we hold that:
For the reasons stated, we
15 U.S.C. § 78j (emphasis supplied). Pursuant to its § 10(b) rulemaking authority, the SEC adopted Rule 10b-5, which, as relevant here, provides:
17 C.F.R. § 240.10b-5 (emphasis supplied). omitted).
As relevant here, we have also clarified that "Section 10(b) and Rule 10b-5 also reach situations where the insider or misappropriator tips another who trades on the information." Obus, 693 F.3d at 285. Accordingly, "[w]hen an unlawful tip occurs, the tippee is... liable if he knows or should know that the information was received from one who breached a fiduciary duty (such as an insider or a misappropriator) and the tippee trades or tips for personal benefit with the requisite scienter." Id. (relying on Dirks v. SEC, 463 U.S. 646, 660, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983)).
17 C.F.R. § 240.10b5-1(b).
